QR pins hopes on foreign demand

QR National
’s
Lance Hockridge
is pinning his hopes on strong international demand for the group’s $6 billion float later this month after an initial allocation to retail investors fell short of expectations.

Bankers for the Queensland rail freight group expect the final retail portion of the float to end up at around 30 per cent when the retail offer closes to the general public on Friday, which would be weaker than initial projections of a 40 per cent allocation.

Mr Hockridge, who is in New York on the final leg of a three-week overseas roadshow before the group’s listing on the Australian Securities Exchange on November 22, told The Australian Financial Review that meetings with more than 750 potential foreign investors had highlighted an appetite for QR National’s shares.

“There is a demand [from investors] for quality," Mr Hockridge said. “People see our company as very much a high-quality opportunity."

A booming market for initial public offerings in the United States and Europe has helped stir foreign interest in the railroad group, he said.

Related Quotes

Company Profile

“In Australia, we don’t realise how hot the IPO scene is in Europe, in particular, and in Asia as well at the moment . . . you’re lucky to get a face to face appointment [with investors]."

Demand for IPOs was strong from investment funds that had been holding onto cash during the global financial crisis and were now looking for a home for it, he said. “A lot of these funds have pent-up demand."

Mr Hockridge, who will spend two days this week in New York before travelling to Toronto, Los Angeles and San Francisco for final meetings after a three-week overseas roadshow that included close to 300 briefings and stops in Singapore and Frankfurt, said he was surprised at the strength of the foreign investment market, particularly in Europe and the US.

“There is a lot of IPO activity and a lot of significant IPOs."

Although America’s share of global floats has waned as IPOs boom in Asia – shares in Coal India rose 39 per cent in the first day of trading after its $3.4 billion float on Thursday – IPO activity in the US is busier than at any time in the past three years. Car maker General Motors is contributing to the US resurgence with a $10 billion float scheduled for the end of next week.

One Singapore-based institutional investor who attended meetings with QR’s management team on the Asian leg of its roadshow said there was increasing interest in Australia as an investment destination because the country was making so much money selling commodities.

The commodity boom was spurring growth in other industries, like housing construction and consumer goods consumption, the fund manager said. “You hear people talking about Australia as an opportunity."

The investor said he believed QR National was a “decent" asset but “fully valued" in the short term, given the float’s forecast price range of $2.50 to $3 per share.

QR National’s bankers remain confident that the float will not be ­repriced, despite some fund managers reporting they will not buy stock, even at the low end of the range.

QR National’s shares are currently trading at $2.69 on the so-called “grey" market, where punters can buy and sell financial derivatives on the price of QR National before it lists.

Retail investors have until Friday to buy shares in the IPO. Retail ­brokers have already been given guaranteed allocations for clients, with initial retail demand accounting for 21-26 per cent of total shares available for sale in the float.

If total retail demand ends up at 30 per cent, some 30-45 per cent of the float would remain to be sold to institutional investors, with the Queensland government planning to hold on to a stake of 25-40 per cent.

The government will decide next week how much it will keep, depending on how strong demand is from fund managers in the institutional book-build, which will be run on November 18-19.

Although many fund managers criticised QR National for its high price-earnings ratio of 21-25 times forecast 2011 earnings, Mr Hockridge said overseas investors understood “earnings are not fully coming through" while the railroad group invests in its operations.

“It’s a message that has been very well received."

The company had also been tackling questions on the “momentum" of its cultural transformation, and its competitive position, Mr Hockridge said, and potential investors were also “drilling into detail“ on the company’s financial figures.

“We don’t have any illusions about the challenge . . . but with the challenge comes opportunity."

QR National has not received questions about the strength of the Australian dollar, which has traded above parity with the US dollar in recent weeks. “It has not come up once in all of those meetings."

Mr Hockridge attributed the lack of questions about the dollar, which some investors have argued could deter foreign investors looking for a short-term return, to investors being focused on long-term returns.

Investors liked the story of a 145-year-old company being privatised, as well as getting exposure to Aust­ralia’s resources sector, and were attracted by the stability of the Aust­ralian economy and its strong corporate governance arrangements, he said.

Potential investors in QR National included infrastructure funds as well as funds specialising in the resource and transportation sectors, he said.